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Trade Deficit On The Rise Again

It’s totally impossible to get America to full employment through an increase in net exports. But given that there seems to be no sign of getting back to full employment through fiscal or monetary stimulus, the most optimistic story I can sketch goes like this. An increase in net exports increases employment somewhat. That increase in employment increases the rate of household formation. With household formation increasing, construction activity picks up again to reflect the undershooting we’ve been doing. With exports and construction back, we start seeing some uptick in retail and food service, and now state and local tax revenues are back so the public sector layoffs can halt.

The good news is that exports are now above the pre-recession level, and we can hope they’ll continue to rise fueled by growth in developing countries. But on imports, as Mark Doma emphasizes, oil put us on the path toward a higher deficit: “Oil imports returned to normal levels in May (in quantity of barrels imported) and prices went up. Therefore, how much we spent on foreign oil shot up by billions of dollars, with oil accounting for ¾ of the increase in imports in May.”

Taxing oil imports and spending the money on domestic infrastructure seems to me like a very good deal.